5 Revenues are generally recognized when: a. The item has an appropriate basis of measurement and a reasonable estimate can be made of the amount involved. b. When performance is achieved. C. Reasonable assurance regarding measurement and collectibility d. band c only e. All of the above. The correct answer is 'd'.

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9 The accrual basis of accounting records: a. Revenues when collected and expenses when paid b. Revenues when earned and expenses when paid c. Revenues when collected and expenses when incurred d. Revenues when earned and expenses when incurred e. None of the above The correct answer is 'd'.

The amount of subjectivity involved in establishing fair valueestimates can be complex for management responsible for making thefair value measurements and disclosures contained in financialstatements. This is particularly true for fair value measurementsfor which observable market prices are not available. Auditingstandards require auditors to obtain sufficient appropriate auditevidence to provide reasonable assurance that fair valuemeasurements and disclosures are in conformity with accountingstandards, and auditing standards provide guidance for auditingthose measurements and disclosures contained in financialstatements.

a. Visit the PCAOB's web site (pcaobus.org) to identify where inthe PCAOB Auditing Standards guidance is provided for auditing fairvalue measurements and disclosures.

b. PCAOB auditing standards require the auditor to obtain anunderstanding of the entity's process for determining fair valuemeasurements and disclosures. Identify 5 things the auditor shouldconsider when obtaining that understanding.

c. What should the auditor consider when engaging a specialistto perform substantive tests related to fair value assertions?

d. Briefly describe the three types of substantive tests of fairvalue measurements that the auditor may perform.

I. True/False 2 points

Indicate whether the sentence or statement is true or false.

____ 1. Revenues and gains are generally recognized when they are realized or realizable and they have been earned through substantial completion of the activities involved in the earnings process.

____ 2. The proportional performance method has been developed to reflect revenue earned on service contracts under which many acts of service are to be performed before the contract is completed.

____ 3. Beginning with the Tax Reform Act of 1986, the tax laws eliminated the use of the completed-contract method.

____ 4. The most popular input measure under percentage-of-completion accounting is the cost-to-cost method.

____ 5. Estimates of architects and engineers of percentage-of-completion are not acceptable under generally accepted accounting principles.

____ 6. At the conclusion of a construction contract, the balance in Construction in Progress will be exactly equal to the amount in Progress Billings on Construction Contracts when using the percentage-of-completion method.

____ 7. If analysis of construction contracts indicates that there will be an overall loss on the contract, the loss should immediately be recognized in full under the completed-contract method and the percentage-of-completion method.

____ 8. Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is recovered through cash receipts with all subsequent receipts reported as revenues.

____ 9. The cost recovery method is the most conservative revenue recognition method.

____ 10. If a company is heavily involved in installment sales, the operating cycle of the business is normally defined as the average period of the installment contracts.

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